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Crowd Funding Can Be A Stumbling Block For Entrepreneurs

In Salt Lake City, designer Jenny Wecker collected pledges in the mount of $42,000 when she used Kickstarter to test market a diaper bag she had created. She received over 300 orders. Previously, she had handmade her product and marketed it on Instagram.

She indicated that she and her husband never considered the tax impact of such success. Apparently, other entrepreneurs are in the same position as they succeed at crowd funding but don’t realize that the IRS considers them to be small businesses with tax responsibilities.

Abraham Finberg, an L.A. tax accountant, says people are stunned when they receive a 1009-K and don’t know what to do. In addition, crowd funding complicates issues related to charitable giving. Is giving money toward having your company name stencilled on a food truck a charitable donation in the eyes of the IRS? Kelly Phillips Erb, a tax attorney from Pennsylvania, says the IRS has to make a decision on these nebulous issues.

Diaper bag inventor, Jenny Wecker, who normally uses TurboTax software to prepare her returns, says she and her husband get tax refunds. This year, she used a paid preparer. She was relieved when, despite the surprise implications of crowd funding her project, they had a flat tax year–neither owing nor being refunded money.

Since Wecker explored Kickstarter, she has gotten questions from many potential customers and has lined up retail clients and wholesale customers, too. She indicates that the crowd funding experiment taught her what mistakes to avoid and also helped launch her design business.